Economic Focus: Kentucky's Economy Lags Behind Typical States'

Kentucky’s economy has grown slower over the past decades when compared with the national averages, but there have been bright spots, noticeably in housing.

“By almost any measure, the Kentucky economy has grown much slower than the typical U.S. state,” says Ken Troske, director of the Center for Business and Economic Research at the University of Kentucky. “And it’s not just a regional issue, because Kentucky has grown much slower than other Southern states. While there are regional differences within the state, no region in Kentucky is more prosperous or has experienced faster growth than the typical U.S. state.”

Troske joined Paul Coomes, economist and professor at the University of Louisville, to give presentations on the state’s regional outlook during the St. Louis Fed’s Economic Teamwork event in Louisville in November. They provide an update for us here.

“While from 1929 to 1970 Kentucky closed the gap between itself and the rest of the country, since then the Kentucky economy has been stagnant or may have even reversed course,” Troske says.

Coomes’ research echoes Troske’s statements. Coomes examined population and job growth over the past three decades in nine economic areas in and around Kentucky. Economic areas are large regional markets, defined by the U.S. Bureau of Economic Analysis. These areas group together contiguous counties that are tied together by commuting, retail, transportation and media. All of the areas containing Kentucky counties also include counties in other states.

Coomes explains that population growth/loss and job growth/loss mirrored each other: If an economic area’s population contracted, so did the area’s job growth. The overall impression is one of a fairly robust economy down the north-south corridors around Interstates 65 and 75, particularly to the south, and of contraction at the far eastern and western parts of the state. (See Figures 1 and 2.)

Data show the steepest decline in manufacturing jobs between 1970 and 2008, while services jobs showed the greatest increase over the same period. While lagging the U.S. averages on population and job growth, Kentucky as a whole fared somewhat better in the housing market. “There was no sign of a housing bubble in any of the nine markets,” Coomes says. “The nine metro areas added a net of 225,000 housing units in the last decade, with a growth of 11 percent, the national average. However, occupied housing units only rose by 135,000, or 7 percent, also identical to the U.S. as a whole; so, vacancy rates have risen substantially in all markets except Bowling Green.”

Figure 1

Three Decades of Population Growth, 1977 to 2007

Economic Areas Around Kentucky

SOURCE: U.S. Bureau of Economic Analysis figures. The figure includes Charleston, W.Va., for comparison.

Figure 2

Three Decades of Job Growth, 1977 to 2007

Economic Areas Around Kentucky

SOURCE: U.S. Bureau of Economic Analysis figures. The figure includes Charleston, W.Va., for comparison.

To help understand why growth in Kentucky lags other states, Troske examined one area that has the potential to give the state an economic boost: the stock of knowledge, meaning the state’s innovative activity coupled with educational levels of the work force. Of all the factors that affect growth (demographics, local and state government and taxes, infrastructure, etc.), “the single biggest factor that explained why some states grow faster is the stock of knowledge in a state,” he says. “Comparing the stock of knowledge in Kentucky to the stock of knowledge in other states shows why Kentucky has performed so poorly over the recent period.”

Kentucky also ranks 48th in the country in the percent of adults with a college degree. One of the primary reasons for the low percentage of college graduates in the state is the high dropout rate at the state’s post-secondary schools. In Kentucky, only 23 percent of students who start at a two-year college end up completing a degree compared with 28 percent in the typical state, while less than half the kids who start at a four-year college end up completing a degree compared with 56 percent for the rest of the country.

Business leaders in general, and community bankers in particular, played a major role in helping to pass the 1991 Kentucky Education Reform Act, which provided a kick-start to the reform of elementary and secondary education in the state. These leaders can play a similar role in reforming higher education in Kentucky. “Bankers could start by urging all participants in the higher education market—students, administrators and politicians—to view education as an investment and to focus on the return of this investment instead of fixating on the initial cost of the investment,” Troske says. He also suggests that education leaders in the state need to be rewarded based on the number of kids who graduate from college and not just on the number who graduate from high school or the number of kids who enroll in college.

Troske concludes by saying that, “Only through a consistent, long-term commitment to increasing the number of college graduates in Kentucky can we reverse the decades-long decline in the state’s economy and begin catching up with the rest of the country.”